Three times you need to watch for signs of a legal storm on the horizon.
In life there are times when the sun's shining and you can afford to act impulsively, to take some unjustified risks, to jump in with both feet without checking the water's temperature first. There are also times when a storm is in the air and you can't afford to play it by ear, when you'll pay a steep price for not getting it right the first time. The trick is knowing which is which and when is when.
For example, if you sign a year lease on an apartment you can't really afford, you'll manage somehow. When the rent is late, maybe you'll get evicted and perhaps your credit score will take a hit-for a while. Possibly you can sublet or even ask your family for a loan. It's just not going to be the end of the world.
But if you buy a house on impulse, failing to research the neighborhood, market trends and historical data, you can really suffer. If you buy the place because you “just love it” and close your eyes to the potential impact of an adjustable rate mortgage, you could take a life-altering hit. That cozy bungalow you fell in love with could suddenly turn on you, leaving you inexorably tethered to a loan balance that far exceeds the house's value. Your impulsiveness might end up being financially devastating and lead to foreclosure, bankruptcy-even permanent damage to personal relationships.
All because you didn't take the steps required to get it right the first time.
Similarly, we veterinarians owe it to ourselves, our financial well-being and the well-being of our dependents to decide when it's OK to sign papers willy-nilly and when we need to do painstaking due diligence and think about possible alternative outcomes. Consider these three potential storms and take precautions to make the right decision from the start-and avoid total devastation.
1. Purchasing a practice with a small profitability cushion
I'm a great believer in practice ownership as a route to professional financial success. Buying and operating a practice isn't easy, but it can be very rewarding financially-as long as you get the financial details right the first time.
As with a house purchase, a veterinarian can fall in love with a practice irrationally: the clinic where he works, a practice conveniently located near his home, or a well-established hospital that just “seems to print money” for the current owner.
Then, on the basis of a “gut feeling,” the veterinarian will jump at the chance to buy the practice at virtually any price, with money borrowed on unjustifiable terms or without consideration of a possible local, regional or national economic downturn.
Once the paperwork is signed and the practice changes hands, that new owner can find himself in a world where he just can't get ahead no matter how hard he works. The practice fails to grow at its prior rate. Interest rates on his loans rise while business stays stagnant. Some competitor opens a practice on a vacant lot with better curb appeal or traffic flow.
Suddenly, that decision to buy-without securing a reasonable price, without looking at interest rate projections, without considering local economic trends or the potential impact of competitors-becomes a regrettable nightmare.
2. Buying into or selling part of an established veterinary practice
Once an associate becomes aware of the financial benefits of practice equity, she may decide to make a play for partnership-especially if the practice where she works appears to be well-managed and highly profitable.
And it isn't unreasonable for a doctor who's spent many years and countless hours developing a thriving clinic to want to throttle back his workweek, splitting the profits and sharing the headaches with his eager-to-own associate.
Be advised, oh you potential buyers-in and partial sellers-out! These are “get it right the first time” moves.
For the associate, the decision to buy in with her boss can be life-changing. If she gets good advice, does excellent due diligence, identifies all the key financial facts and objectively appraises the dynamics of the working relationship she will have with her former employer (soon to be partner), things may unfold beautifully. She may find herself part owner of a terrific, financially rewarding veterinary medical enterprise.
But what if she doesn't get it right the first time? In a word, trouble.
While I'm not saying that there's no emerging from a badly planned equity acquisition in a veterinary clinic, there may be a lot of shoveling required to get out of the hole. Bad planning as well as poor accounting, legal and professional counseling in the prepurchase period can lead to problems like these:
> Irreconcilable personal disagreement. At the risk of being overly simplistic, consider what often happens: A highly efficient associate buys into a practice and pays fair value for a minority interest. Later, the seller chooses to cut back his own hours and, to maximize cash flow, caps the minority partner's salary while increasing his own. The buy-in money is nonrefundable and the two practitioners (and their spouses) are locked into a long-term resentment fest.
> Sudden realization that the associate has been hoodwinked. An example from my filing cabinet: After a market valuation, an associate buys into a large clinic by purchasing a 10 percent ownership for $100,000. The seller now has a captive medical director. When he subsequently approaches a large corporate veterinary group, he can present a turnkey practice with a fully invested veterinarian whose only escape would be to walk away from his six-figure investment. If the associate had enlisted quality prepurchase advice, documents would have been drafted to prevent such a bait and switch.
> Seller is blindsided by unexpected issues with his minority partner. In an effort to create an incentive for his high-quality associate, the clinic owner sells him 25 percent of the practice with a set salary and obligatory annual distribution of profits pro rata. All goes well for two years until the associate gets seriously ill-but is still able to work occasionally. Or the associate gets divorced and moves away or becomes addicted to pain medication or alcohol.
Uh oh! Nothing in the bylaws, purchase agreement or shareholder documents provides for terminating the partnership except in the event of death or total disability. The seller/majority partner veterinarian has to keep sending checks to his virtual absentee partner (or his wife, or his creditors, or Medicaid) until the dust of years of litigation settles.
3. Signing an employment contract without anticipating the future
Time and again associates will sign an employment agreement with no review or just a cursory reading. They do this without brainstorming the future. Sometimes it doesn't matter and never causes a problem. But in lots of cases this decision to ink a deal without evaluating the details turns into a costly failure to get it right the first time. Here are some typical examples of how this frequently plays out.
> “I'll just move if this job doesn't work out for me.” That justification proves naïve. After a few years pass, relationships develop and suddenly the doctor has a wife and two kids in the local school. When the clinic where the doctor works is sold, along with his assignable noncompete, he can't move, even though the new management is intolerable to work for.
> “I'm sure that the noncompete language is unenforceable because it's too far and too long.” The good news, doctor, is that you're right. The noncompete you signed without thinking probably is overbroad and you are likely to win any eventual litigation. But there's some bad news. From the time you decide to leave your job until the noncompetition terms are fully litigated or settled, nobody around is going to hire you. No new employer is likely to want to step into that mess. And trust me, the wheels of justice can turn very slowly-especially when the one being sued has no income.
Christopher J. Allen, DVM, JD, is president of the Associates in Veterinary Law PC, which provides legal and consulting services exclusively to veterinarians. He can be reached via e-mail at email@example.com.